Wednesday, 15 April 2020

COVID-19 impact on the global oil market - Alex Mould writes

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April 15, 2020

Before the intense spread of COVID-19 to the rest of the
world, this year had already started as an interesting one for the oil
industry. We observed a production war between Russia and Saudi Arabia-really a
war between Russia and USA; which led to over-production and consequently, the
immediate collapse of the oil price to as low as US$20 per barrel.

Now in the heat of its spread, the pandemic has effected a
two (2) percent slowdown in development of all economies globally – with of
course, some countries being hit harder than others. Global consumption has
dropped from a high of about 90 million barrels/day to less than 70 million
barrels/day, which is a tremendous impact to the supply and demand curve
guiding the oil industry.

This drastic slowdown of oil and gas demand, coupled with
the impacts of a brutal price war among the powers that be, has the industry
struggling to maintain the status quo in comparison to the recent past. There
were calls last week for a truce between these producers which needed the
Organization of the Petroleum Exporting Companies (OPEC members) to all agree
on supply cuts. This seems to have been somewhat successful, as prices have
risen to over US$30/bbl, and should remain in this range ($30-40/bbl) for the
next 2 months should these producers adhere to the supply-cuts agreement. The
rest of the world will have to wait and see if all parties in this cartel
comply; something that’s very difficult to do.

In addition, the pandemic will lead to a recession of sorts
in most countries, with the level of impact varying as a result of government’s
ability to manage the economy while their countries lockdown, and stimulate the
economy thereafter in the “new normal”.

The oil and gas industry like all others will
have to patiently wait as demand begins to rise slowly as the world reopens and
gains a foothold on managing the virus.